Friday, October 5, 2012

How evil a thing is inflation?

It is true that in times of general rise in the price level, if all groups of prices, such as agricultural prices, industrial prices, prices of minerals, wages, rent and profit rise in the same direction and by the same extent, there will be no net effect on any section of people in the community. For example, if the prices of goods and services, which a worker buys rises by 50 per cent and if the wage of the worker also rises by 50 per cent then there is no change in the real income of the worker, ie., his standard of living will remain constant. However, in practice, all prices do not move in same direction and by same percentage. Hence, some classes of people in the community are affected by inflation more favorably than others. This is explained as follows: